These 4 indicators indicate that WinWay Technology (TWSE:6515) is making good use of its debt

Li Lu, an external fund manager backed by Berkshire Hathaway's Charlie Munger, says, “The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.'' It has even been stated. When we think about a company's risk, we always look at its use of debt. Because too much debt can lead to ruin. Points to keep in mind are: Winway Technology Co., Ltd. (TWSE:6515) has debt on its balance sheet. But the more important question is how much risk that debt creates.

What risks does debt pose?

Debt supports a company until the company has difficulty paying it back with new capital or free cash flow. Part of capitalism is the process of “creative destruction” in which failing companies are ruthlessly liquidated by bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, resulting in permanent shareholder dilution. However, as an alternative to dilution, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When investigating debt levels, we first consider both cash and debt levels together.

Check out our latest analysis for WinWay Technology.

What is WinWay Technology's debt?

As you can see below, at the end of December 2023, WinWay Technology had debt of NT$395.2m, compared to no debt a year ago. Click on the image for more information. However, it also held cash of NT$899.4m, resulting in a net cash position of NT$504.2m.

How healthy is WinWay Technology's balance sheet?

According to its last reported balance sheet, WinWay Technology had liabilities of NT$979.3m that were due within 12 months and liabilities of NT$406.8m that were due beyond 12 months. Offsetting this, it had cash of NT$899.4m and his receivables of NT$885.4m due within 12 months. Therefore, the company can boast of NT$398.6 million more liquid assets than other liquid assets. total liabilities.

This situation indicates that WinWay Technology's balance sheet is very strong, as its total liabilities are roughly equal to its current assets. So it's highly unlikely that the NT$29.1b company is short on cash, but it's still worth keeping an eye on its balance sheet. Simply put, WinWay Technology boasts net cash, so we can say it doesn't have a lot of debt.

WinWay Technology isn't under as much pressure, as its EBIT fell 59% in the last year. Declining profits (if this trend continues) could eventually make even small amounts of debt very risky. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, WinWay Technology's ability to strengthen its balance sheet over the long term will depend on the future profitability of the business.If you're focused on the future, check this out free A report showing analyst profit forecasts.

But final considerations are also important. This is because companies cannot pay their debts with paper profits. I need cold cash. WinWay Technology has net cash on its balance sheet, but we can calculate its earnings before interest and tax (EBIT) to understand how quickly it's building (or eroding) that cash. It's still worth considering the company's ability to convert that into free cash flow. balance. Over the past three years, WinWay Technology generated free cash flow equivalent to 17% of his EBIT, which is not an amazing performance. This low level of cash conversion impairs the ability to manage and repay debt.

summary

It's always wise to investigate a company's debt, and in this case WinWay Technology has a decent balance sheet with net cash of NT$504.2m. Therefore, there is nothing wrong with WinWay Technology's use of debt. There's no question that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet, far from it. For example, WinWay technology includes 3 warning signs (And the one we don't like very much) we think you should know about.

After all, it may be easier to focus on companies that don't even need to take on debt.Readers can access a list of growth stocks with zero net debt completely freeright now.

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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.